# CDs and Money Markets Could someone explain to me in stupid english what the difference between a CD and Money Market account is? We'll be saving money to purchase a house in 2-3 years time with no need to access the money before hand. Which would be better for our situation? ## Thread In General · started by okiron · 29 replies - **Category:** [General](https://nihonken.org/community/c/general) - **Forum:** [Nihon Ken Forum](https://nihonken.org/community/) ## okiron · 2008-02-06T04:36:22.000Z Could someone explain to me in stupid english what the difference between a CD and Money Market account is? We'll be saving money to purchase a house in 2-3 years time with no need to access the money before hand. Which would be better for our situation? ## Romi (admin) · 2008-02-06T05:18:25.000Z I would suggest doing a Risk-Free CD. Basically, you can put money away into the account, I think the minimum is 5k. But if you have an emergency and need to take the money out before the maturity date, there is no fee's or penalties. John and I did a Bank Of America Risk-Free CD for 6 months @ 4.5%. Good thing we chose the Risk-Free because we ended up taking a large sum of the money out because of a family emergency. Even though you don't think you'll need to touch the money, if its a large sum above 10k, and you have no other savings account, I would recommend doing the Risk-Free CD just in case (you never know). Im not too familiar with the money market. But I think it's like a savings account, but you get a higher interest rate than a regular savings account. I think you can get some kind of cash bonuses also. ## MommyofNiko · 2008-02-06T10:59:20.000Z Ditto ## okiron · 2008-02-06T11:04:07.000Z Romi we will be opening the CD/Money Market with BofA. We will have a regular savings account opened along with it but it wouldn't have more than $1000 in it. ## _dlroberts · 2008-02-06T11:07:09.000Z A CD will generally give you a higher return on your investment but will lock your money up for the duration of the CD period. Generally speaking, the longer the term, the higher the interest rate (although there are exceptions). What you want to look at with a CD is the APR, not the interest rate. The APR tells you how much you'll get including the compound interest (interest on the principle investment + the interest earned). CD's are generally back by the FDIC and you are therefore guaranteed to get your investment back, even if a catastrophic system failure occurs. Unless you get a "bump" CD, the interest rate and APR will remain fixed for the duration. On the other hand, a money market is an institutional fund that is actually backed by market holdings. The price of a share is regulated to be one dollar. These are much more volatile than a CD as they follow the market pretty closely. They are generally insured by the FDIC as well, although there have been some regulatory issues in the past few months that have many investors concerned.  A CD is probably a safer investment and will probably have give you a higher yield, but it will generally lock up your investment whereas a Money Market will give you the freedom to take your money whenever you want to but won't pay as much interest. Romi suggests a Risk Free CD which I'm not particularly familiar with, that sounds like a reasonable option. There is another option too. If you have enough principle to invest that you don't think you'll need all of it for a family emergency, you can ladder a bunch of CDs. Suppose you are investing 10K. Rather than but one CD for 10K  you can buy 5 CDs for 2K and schedule them so they come due every month or two months or 3 months or whatever. That way you'll always have some of your money available within a few weeks should you need. You'll have to compare interest rates and minimum investments to make sure you can do it. Anyway, sorry for the long boring post. I hope this helps some! ## okiron · 2008-02-06T11:12:53.000Z Wow Dave thanks for the explanation. It wasn't boring at all. And the whole buy 5 CDs instead of 1 makes a lot of sense and smart. A CD sounds more like what I'm looking for by what you're saying. ## JessicaRabbit (admin) · 2008-02-06T11:13:52.000Z This is a very grown up thread! Personally, if you can, I would say try to diversify. Put a sizable chunk in  the highest yield CD you can get, then take a smaller chunk and go money market. With everything as low as it is right now you can get your hands on more, and since you won't be touching it for a while, you have a good chance of a market shift that could profit you pretty nicely. It's a risk, but the CD is then your safety net. Like a house fund (which leads to guaranteed equity, and a retirement fund. I am gonna go play XBOX my grown up side is trying to take over. ## okiron · 2008-02-06T11:27:45.000Z Hehe I could act my age once in a while :P Jessica that's a great idea too. I knew it was a good idea to ask you guys. ## _dlroberts · 2008-02-06T11:44:36.000Z Yeah, Jessica raises a good point. Diversifying is always a good idea when it comes to investing. Normally I would agree with her but with all of turbulence in the market and the issues surrounding money markets right now I would be a bit more cautious. One thing you might consider is laddering a bunch of CDs and moving some of the money to a money market as things stabilize in six months or a year. Of course, in theory, a money market will never loose value so its also a pretty safe investment. The risk in a money market is tied to the volatility in the market and is therefore more of a "missed opportunity" risk than an actual threat to your principle. Of course, Jessica could be right and the Market will turn the corner in the near future and you'll be right there to take advantage of it. Another note on laddering CDs. Shorter term CDs will likely pay less yield than longer term CDs and when they expire and you renew them you will get the current rate. If rates are down at the time you will get a lower rate but if they are up you will get more. From my understanding, analysts think that the fed will continue to cut rates for the next six months or so to where they will bottom out around 3.25-3.5%. That's another thing to consider. Basically what it comes down to is determining the level of access you'll need to your investment and the amount of risk you're willing to tolerate. One piece of advice that I can give you is to do your research, make a decision, and then stop worrying about it. Its impossible to out smart the market and when you keep watching things closely or second guessing yourself it becomes really stressful. Good luck! ## MommyofNiko · 2008-02-06T22:26:07.000Z This is way too grown up for me to read...Now remember that I spend all day with a 1 year old, 2 1/2 year old and 7 year old and now a mom on bed rest.  The most stimulation I get is telletubies....TUBBY CUSTARD!!!! ## Romi (admin) · 2008-02-07T00:27:19.000Z I think it really depends on how much money you are putting away.  If you're putting away 1k for 2 years at 2%, I don't really think its worth it.  But if its like 10k , i think it's definately a good choice.  Also, don't forget....you have to pay tax on any profits! ## okiron · 2008-02-07T01:53:42.000Z LMAO @ Rachael. Again, again! My brother loved that show.  Lol yeah Romi $1k for 2 years is basically worthless not to mention it wont get us anywhere with purchasing a house. How's your own house hunting going? Any good leads? ## Romi (admin) · 2008-02-07T03:04:29.000Z We took a look at a couple houses, but none are jumping out at me.  I think we might just get a fixer upper and flip it and buy a house that we can really enjoy.  My parents are now thinking they are not going to sell yet.   So I don't know now...They aren't being very helpful.  My mom said she would give me a 2 month notice before I have to move out *blah* .  We can always move back to their house as a last choice if we really have to.  But we'll see.  Thanks for asking! ## JessicaRabbit (admin) · 2008-02-07T09:51:12.000Z My realtor told me. When it is the right house. You will walk in and get nervous. Wait for one that makes you nervous. Flipping a house in this market is beyond risky. The house I just bought is a perfect example. A realtor bought it. Sunk thousands of dollars into it (my home inspectors were the same inspectors who inspected it when he bought it. They were telling me about what it looked like BEFORE he bought it). Then the market crashed. He lost about 50k. I am getting the house for CONSIDERABLY less than he ever intended to  sell it for. ## MommyofNiko · 2008-02-07T10:56:52.000Z Our house was a foreclosure.  We tried to sell it last year but we are surrounded by foreclosures.  We got an amazing deal on it.  I agree with Jess.  When you know you feel it in your gut. ## Romi (admin) · 2008-02-07T16:07:37.000Z Yeah, my mom told me not to get sold on the first house I see.  The first time i looked at a house I fell in love and I was begging my mom to let me buy it! And of course she said no.  She told me to look around more.  I went back to that community to look at a different house and I just wanted to check that house out again to see if I still like it.  And what do ya know, I didn't like it anymore.  So I guess I will just keep looking.   John and I are planning to sell our cars (they are both paid off) and he is going to lease a car that his work will pay half the payments.  And then I have to see what kind of car to get.  I want to keep the Mini, but my mom wants it. grrrr!  Maybe ill get the new mini.  I donno.  But the money we get for our cars will be put away towards the house downpayment.  My mom told me I need at least 20% down, no buts, ands, or whats about it!  She's so mean to me.  But I know its for the better. ## sujewel · 2008-02-13T23:54:08.000Z I'm getting in on this late and I didn't have the opportunity to read all the posts. But here's what my stockbroker told me when I was looking to invest for the purpose of saving for a home purchase. If I was looking to purchase in a year, then she suggested I put the money into a CD.  If, however, I was looking further down the road - 3 to 5 years, she suggested a balanced portfolio of mutual funds and bonds. And she also agreed with Romi's mom....20% down. Talk to a broker. I went with Smith Barney. ## brada1878 (admin) · 2008-02-14T01:46:29.000Z It was hard for us to get a loan, even with near perfect credit, without 20% down on our house... The industry has really tightened up. We got our loan through BOA and ended up getting 10% down but it was a real fight... at the end of the day, the more you have down the better you are in the long run. So I agree - go for 20% down. ## Romi (admin) · 2008-02-14T02:40:40.000Z Yep, its a lot of money to save up, but its definately worth it.  You don't want to be stuck in a situation and end up having your house foreclosed.  The percentage of foreclosed homes is insane.  You have to think about the future too, if something happens and you or your significant other loses your job, would you be able to pay for your mortgage for 1-2 months or however long you're out of a job for and still be able to survive?  Everyone thinks buying a house is the most wonderful best thing in the world, and it is for some people.  But it could also be the worst decision you ever made.  So just make sure to talk to a lot of people and get the most advice you can.  Im lucky because my mom has been doing real estate for 20+ years and she gives me a lot of advice and puts me in check.  My good friend is also a financial advisor, so when i have any financial questions, i always ask him. Anyways, Good Luck with your investment, whichever way you decide to go! ## sujewel · 2008-02-14T11:09:38.000Z Wow, Brad!! I can't believe how much banks are tightening up in the rest of the county. I'm a real estate agent in NYC and we didn't go through the downturn or much of a credit crunch! Because Co-op buildings represent 70% of our market, there were very few foreclosures in NYC. Co-op Boards are stricter than banks in terms of debt-to-income ratio, require liquid assets (mortgage + Maintenance - minimum of 2 years) AND a minimum of 20% down. It isn't uncommon, however to see 25% and 40% down buildings and some buildings, though very few, require 100% down. ## brada1878 (admin) · 2008-02-14T13:21:53.000Z wow - 100% down, that would be rough. Yea, I was really shocked by how hard the credit thing was, we where pre-approved for 5% down, then when we got into the final stages the banks had tightened thing up again and our banker was telling us to expect to put 20% down... then we got it down to 10%, but it was not easy - at all. The housing market changed a lot too - we looked all over the country for where we wanted to move and Taos (where we live now) was about 100k more per house than we wanted to spend... we waited 6 months and looked again and the houses where down to the range we wanted... it was shocking how fast it changed! ## sujewel · 2008-02-14T17:03:33.000Z That's 100% down PLUS 3 years maintenance liquid and available. The housing market has changed in the few years I've been in the biz. But it hasn't changed in the same way in NYC. Our market is segmented on it's own and parts of the market have turned down, while others have shot up or levelled out. In 2007 we hit a ton of records.... Average of $1144/square foot New apartment sales record with a $60M purchase of nearly an entire floor at the Plaza Highest price per Square foot Sale in the Financial District at $3512/sf. The apartment was 1623 square feet!!! Studio's hit the high mark at $3000/month - we're talking an average of 400sf. It goes on and on. And the commercial market was even stronger! Even crazier is the fact that New York dropped in rank for the 'Most Expensive Cities to Live' ## Romi (admin) · 2008-02-14T17:10:05.000Z Holy shit!  That is super expensive!!!  And I thought Orange County was expensive!  How do people survive out there!  Thats insane! ## brada1878 (admin) · 2008-02-14T17:15:16.000Z yea, wow, that is insane! ## sujewel · 2008-02-14T17:27:40.000Z We're slowly eeking out the middle class. They have to live in the outer broughs, Westchester and Jersey. Sadly, I'm not even joking about that. I just ran the numbers...at a 6% interest rate, an indivdual making $150k per year can afford a $505k apartment (taking into consideration a $700/month maintenance). Using the $1144/square feet, that's a 441sf apartment. Two people in an apartment that size? HA. And that's just the average. I've seen 450sf apartments for $675k and up. That's why I live in JERSEY, only 35 minutes to my office - door to door. P.S. Those stats above were published January 2008. ## sujewel · 2008-02-14T17:30:30.000Z By the way Brad, in the future, get a commitment letter from the bank. Plus, it goes over well with sellers. ## okiron · 2008-02-14T17:31:27.000Z Holy Jebus!!!!!!! Yeah...Orange County seems cheap now. ## brada1878 (admin) · 2008-02-15T00:08:13.000Z I did actually have a commitment letter - specifically for when we were looking at houses... those commitment letter don't do anything, banks will screw w/ you how ever they please. ## sujewel · 2008-02-15T12:42:23.000Z That's odd, Brad. Those commitment letters are legally binding and give our buyers a specified amount of time - 10 is typical, but banks here will give you up to 100 days. ## brada1878 (admin) · 2008-02-15T14:39:58.000Z yea, that is how I understood it too. --- **Navigate:** [Forum home](https://nihonken.org/community/?format=md) · [Sitemap](https://nihonken.org/community/sitemap.xml)